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Author: 

Mechanics  and  Metals 
National  Bank 

Title: 

Acceptances,  their 
purpose  and  advantages 

Place: 

New  York 

Date: 

[1917] 


MASTER   NEGATIVE   # 


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Columbia  ©nitoeraftp 

mtftfCitpofiamgork 

THE  LIBRARIES 


GRADUATE 

SCHOOL  OF  BUSINESS 

LIBRARY 


Acceptances 

J. 


Their  Purpose  and 
Advantages 


SCHOOL  Of 

BUSINESS 

LIBRARY 


The  Mechanics  &  Metals  National  Bank 

20  Nassau  Street,  New  York 


Capital,  Surplus  and  Profits,  $18,000,000 


D 


ajjuaxjuu:^ 


Copyright  by 

The  Mechanics  &  Metals  National  Bank 

of  the  City  of  New  York 


Contents 

Historical 5 

The  American  Bank  Acceptance 12 

Dollar  Acceptances  against  Imports 15 

Dollar  Acceptances  against  Exports 29 

Dollar  Acceptances,  Domestic 34 

Trade  Acceptances 38 

Advantages  of  the  Trade  Acceptance 42 

Advantages  to  the  Buyer 50 


I 


I 


i" ' 


\ 


Acceptances 


HISTORICAL 

MANY  radical  changes  in  the  mechan- 
ism of  national  and  international 
finance  have  taken  place  in  the  past  few 
years. 

Not  the  least  important  of  these  changes 
has  been  the  creation  of  the  American  Bank 
Acceptance,  the  recognition  of  the  Trade 
Acceptance,  and  the  establishment  of  the 
American  Discount  Market. 

Before  speaking  of  the  American  Bank 
Acceptance  and  analysing  it  in  detail, 
it  might  be  of  interest  to  touch  briefly 
upon  the  subject  of  Bank  Acceptances  in 
general,  and  the  experience  gained  by 
other  nations  while  the  use  of  the 
Acceptance  was  in  the  process  of  evolution. 

The  Acceptance  is  the  simple  and  logical 
product  of  generations  of  trade  and  banking 
experience.  Based  upon  the  scientific  sys- 
tems of  the  leading  European  countries,  it 

5 


ACCEPTANCES 

long  ago  proved  ample  to  meet  all  the 
requirements  of  commerce  and  trade. 
Indeed,  it  constituted  a  long  step  in  the 
upbuilding  of  commercial  banking  in 
Europe.  In  every  sense  a  commercial 
document,  the  Acceptance  established  a 
system  under  which  commercial  credit 
assumed  a  position  of  pre-eminence  as  a 
controlling  attraction  for  liquid  capital,  a 
position  in  the  money  market  to  which 
that  form  of  credit  was  rightly  entitled. 

The  first  people  to  lend  their  credit  to 
others  through  the  medium  of  the  Accep- 
tance were  the  English.  The  names  of 
the  London  x\cceptance  houses  of  today, 
called  "Merchant  Bankers,"  are  known 
throughout  the  world.  Certain  of  these 
Acceptance  houses  were  originally  import 
merchants  of  exceptionally  high  standing, 
who  paid  for  their  imports  by  "accepting" 
long  drafts  drawn  upon  themselves  by  the 
shippers  in  foreign  countries.  After  these 
drafts  were  accepted  they  were  discounted 
with  the  Deposit  Banks  or  private  bankers 
at  rates  which  had  a  distinct  relation  to 
the  standing  of  the  acceptors. 

6 


l 


i 


I 


ACCEPTANCES 

It  is  thus  that  the  development  of  Accept- 
ances came  about.  Merchants  of  a 
moderate  standing  who  endeavored  to  fol- 
low the  procedure  of  the  larger  houses 
encountered  obstacles  in  the  early  stages, 
which  made  the  financing  of  their  impor- 
tations a  hardship.  They  either  could 
not  buy  against  their  own  Acceptances  at 
all,  or,  if  they  could,  the  rates  charged  for 
discount  and  commission  to  insure  the 
risk  were  so  high  that  the  final  cost  of  the 
imported  wares  left  too  small  a  profit  to 
compensate  them  for  their  labor. 

These  merchants  soon  found  that  by 
borrowing  the  signature  of  one  of  the 
leading  merchants,  they  could  finance  their 
imports  more  advantageously.  They 
found  that  the  advantages  gained  far 
exceeded  the  small  commission  paid  for 
the  service.  At  the  same  time  the  leading 
merchants  were  quick  to  see  the  profit 
for  themselves,  and  for  the  trade  of  the 
country,  in  lending  their  signatures  by 
way  of  accepting  drafts  for  other  merchants. 

On  account  of  their  intimate  knowledge 


ACCEPTANCES 

of  trade  conditions,  their  knowledge  of  the 
various  kinds  of  merchandise  which  were 
to  be  imported  and  which  were  pledged 
as  security,  of  values,  seasonal  demands 
and  markets,  the  leading  merchants  were 
particularly  qualified  to  grant  such  credits. 
In  the  course  of  time,  these  merchants 
turned  more  and  more  to  the  business  of 
lending  their  credit  in  the  form  of  Accept- 
ances, not  only  at  home,  but  to  foreign 
merchants,  banks  and  corporations.  In 
connection  with  this  work,  and  on  account 
of  their  intimate  knowledge  of  certain 
overseas  countries,  they  became  pioneers 
in  extending  loans  abroad,  and  thus  exerted 
a  vast  influence  on  the  expansion  of  English 
foreign  trade. 

While  thus  England  was  extending  its 
credit  all  over  the  world,  continental  coun- 
tries, particularly  France  and  Germany, 
showed  an  economic  growth  which  resulted 
in  an  ever-increasing  demand  for  Accept- 
ance credits  whereby  to  finance  their 
overseas  trade.  Having  already  developed 
a  home  market  for  their  domestic  Bank 
and  Trade  Acceptances,  an  effort  was  made 

8 


I 


■N 


ACCEPTANCES 

by  France  and  Germany  to  break  away 
from  London  and  establish  Franc  and 
Mark  Acceptances  in  the  international 
exchange  market. 

The  first  efforts  failed.  One  main 
reason  for  the  failure,  and  for  the  preference 
given  to  the  Pound  Sterling,  was  found  in 
the  fact  that  London  was  the  only  free 
gold  market  in  the  world,  a  bill  on  London 
meaning  gold  and  nothing  but  gold  if 
demanded.  Another  reason  was  the  superi- 
ority of  the  London  discount  market, 
which,  guided  by  a  farsighted  discount 
policy  on  the  part  of  the  Bank  of  England, 
was  always  able  and  willing  to  absorb  any 
bills  offered  in  the  market. 

In  final  recognition  of  this  undeniable 
preference  for  the  Pound  Sterling,  a  number 
of  the  most  powerful  continental  banks 
established  branches  in  London,  and  the 
new  capital  brought  into  that  market  was 
used  by  these  foreign  branch  banks  chiefly  as 
a  basis  to  grant  Sterling  Acceptance  Credits, 
particularly,  of  course,  for  the  benefit  of 
customers  of  the  home  country.  These 
credits    have  run    into    enormous  figures. 

9 


i 


ACCEPTANCES 


ACCEPTANCES 


Gradually  French  and  German  bankers 
were  able  to  establish  a  limited  market  for 
Franc  and  Mark  Acceptances,  but  as  time 
went  on  these  came  to  be  used  chiefly  to 
finance  their  own  imports. 

Some  of  the  factors  found  particularly 
effective  in  establishing  Acceptance  markets 
in  foreign  countries,  which  should  be  of 
special  interest  to  America  in  its  present 
endeavor  to  establish  foreign  markets  for 
Dollar  Acceptances,  may  be  summarized 
as  follows: 

Large  exports  with  which  to  offset  im- 
ports. 

Direct  steamship  connections  with  all  im- 
portant oversea  ports. 

Establishment  of  a  charter  market. 

The  upbmlding  of  insurance  companies 
to  underwrite  marine  and  other  risks. 

Direct  cable  lines  to  foreign  countries. 

Extension  of  loans  to  foreign  govern- 
ments, thus  encouraging  valuable  trade 
relations. 

10 


A  strengthening  of  the  financial  structure 
at  home  and  the  establishment  of  a 
stable  yet  elastic  discount  market. 


11 


A 


THE  AMERICAN  BANK  ACCEPTANCE 

Until  the  establishment  of  the  Federal 
Reserve  System,  in  1914,  America  was  one 
of  Europe's  best  customers  in  the  use  of 
its  Acceptance  facilities.  A  large  part  of 
America's  great  import  trade  was  financed 
via  London,  Paris  and  Berlin,  through 
Bank  Acceptances. 

The  annual  tribute  paid  to  Europe  for 
this  service  was  not  only  an  unnecessary 
burden,  but  also  reflected  upon  the  dignity 
of  a  nation  of  the  political  and  economic 
importance  of  the  United  States  of  America. 
The  Federal  Reserve  Act  finally  gave  to 
national  banks  the  power  to  "accept". 

The  first  long  drafts  drawn  in  dollars 
on  American  banks,  when  offered  in  the 
foreign  markets,  were  looked  upon  by  the 
foreign  bankers  with  doubtful  eyes,  and 
could  only  be  sold  by  the  drawers  at  a 
disparity,  as  compared  with  the  Pound 
Sterling. 

Before  long,  however,  banks  and  bankers 
all  over  the  world  began  to  realize  that 

12 


ACCEPTANCES 

America  had  set  its  new  financial  machinery 
in  motion;  that  a  discount  market  was 
rapidly  being  established;  and  that  bank 
bills  drawn  on  New  York  could  readily  be 
discounted  and  at  advantageous  rates. 

As  a  consequence,  foreign  bankers  began 
to  quote  closer  rates  for  such  bills— especial- 
ly since,  simultaneously  with  these  offerings 
of  American  Bank  Acceptances,  a  strong 
demand  for  remittances  on  New  York  and 
other  American  centers  sprang  up. 

The  reasons  for  this  demand  were  obvi- 
ous. America,  as  a  result  of  the  war, 
suddenly  became  the  world's  work-shop; 
its  export  trade  increased  to  unparalleled 
figures.  Aside  from  its  trade  with  Europe, 
new  markets  were  developed  in  Central 
and  South  America,  the  Far  East,  Africa, 
and  Asia. 

Formerly  the  foreign  customer  would 
have  remitted  to  the  American  shipper  a 
bill  on  London,  Paris,  or  Berlin  in  settle- 
ment of  his  debt,  leaving  the  risk  of 
exchange  to  the  American  merchant,  for 
to  have  remitted  a  draft  on  New  York 
would  have  been  too  costly,  there  being 

13 


ACCEPTANCES 


no  market  for  such  bills  and  foreign  bankers 
therefore  charging  arbitrary  rates  and  extra 
commissions  for  such  service. 

But  with  the  new  conditions  bankers  in 
foreign  countries  became  ready  buyers  of 
American  Bank  Acceptances,  wherewith  to 
create  New  York  funds,  selling  such  funds 
in  turn  to  their  customers  who  had  a  debt 
to  meet  in  the  United  States.  Thus  a 
channel  was  opened  for  the  ebb  and  flow 
of  credit  transfers  between  the  United 
States  and  all  other  countries,  with  the 
result  that  today  the  American  dollar  is 
quoted  at  all  the  principal  exchange  markets 
of  the  world. 


:M 


»•' 


li 


DOLLAR  ACCEPTANCES  AGAINST 
IMPORTS 

The  Dollar  Acceptance  has  taken  a 
leading  position  in  the  world's  credit 
markets,  and  has  established  itself  firmly 
in  the  estimation  of  the  American  importer 
and  exporter.  Taking  the  importer  first; 
what  are  the  advantages  of  the  Dollar 
Acceptance  to  the  American  importer.^ 

First:  Cutting  out  of  lost  motion,  and 
release  from  the  commission  formerly 
paid  the  London  banker.  If  the 
American  importer  desires  a  sterling 
credit  he  must  in  most  cases  open  it 
through  the  medium  of  an  American 
bank.  The  commission  which  he 
pays  must  be  sufficient  to  compen- 
sate the  American  bank  as  well  as 
the  London  bank  on  which  the  credit 
is  drawn.  In  other  words,  for  a 
sterling  credit  the  importer  pays 
two  commissions,  while  for  a  dollar 
credit  he  pays  but  one. 

15 


/\ 


ACCEPTANCES 

Second:  Elimination  of  the  risk  in 
exchange.  By  the  use  of  the  Dollar 
Acceptances  the  American  importer 
knows  exactly  what  his  goods  cost 
him,  and  there  is  no  ambiguity  as  to 
how  much  money  he  owes  his  bank 
at  the  time  the  Acceptance  falls  due. 
In  case  of  an  Acceptance  in  foreign 
money,  the  risk  of  exchange  is  an 
all-important  factor  in  view  of  the 
extreme  fluctuations  to  which  the 
exchanges  are  sometimes  subject. 

Third:  Benefit  of  the  money  rates  quoted 
in  the  New  York  market,  which  on 
the  average  are  likely  to  be  lower 
than  those  of  other  money  centers. 
New  York  has  now  a  well-developed 
discount  market,  and  the  ever  in- 
creasing demand  for  Bank  Accept- 
ances as  a  form  of  investment  is 
plainly  in  evidence. 

Fourth  :  Advantage  of  direct  service.  Con- 
tingencies frequently  arising  in  con- 
nection with  foreign  shipments  can 

16 


■f 


(MAY    BC   COnKOl 

APPUCATION  FOP. 


COMMERCIAL  LEHER  OF  CREDIT 


The  Mechanics  Q  Metals  National  Bank 

OF  THE-CITY  OF  NSW  YORK 

Foreign  Departmtnt, 

"  r*  City. 


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..  ..bllla  of  ladii^  to  th«  onlar  of  the  Mochaaicf  aod  Hatal* 

lational  Bwnk. _. 


Marine  .         . 

War  risk  '"durance  is  to  be  covered  by    ounelvea  in  R«v  York 

Credit  to  be  available  until larch  Slat   ..._ 

SPECIAL  INSTRUCTIONS:         ^ 

Billa  of  lading  auat .  ahoH  .freight  .p»i*id.. 


19  It. 


Yours  truly. 


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.B..  uid  Coapany 


: 


ACCEPTANCES 

be  adjusted  more  promptly,  cheaply, 
and  eflFectively,  between  the  Ameri- 
can banker  and  the  foreign  shipper  or 
his  banker,  than  could  be  done  if  such 
adjustments  had  to  be  made  via  the 
London  banker,  as  would  be  neces- 
sary in  using  a  Sterling  credit.  This 
point  should  not  be  underestimated. 
In  these  days  of  abnormal  fluctuation 
in  prices  for  all  kinds  of  merchandise, 
a  deal  is  sometimes  made  or  unmade 
according  to  the  promptness  with 
which  the  American  bank  is  able 
to  back  up  the  transaction,  either 
as  a  whole  or  in  regard  to  some 
technical  point  suddenly  raised  by 
the  shipper. 

Dollar  Acceptances  drawn  on  National 
Banks  against  imports  are  generally  drawn 
against  what  is  known  as  a  Commercial 
Letter  of  Credit.  A  commercial  credit  is 
an  undertaking  on  the  part  of  the  bank  to 
loan  its  credit  (not  its  funds),  to  a  customer. 
The  customer,  who  is  the  original  recipient 
of    this    extension    of    the    bank's    credit, 

18 


I 


fl 


ACCEPT  A XCES 

utilizes  it  by  making  it  available  in  favor 
of  the  foreign  shipper.  He  therefore  re- 
quests the  bank  to  notify  the  shipper  that 
the  latter  may  draw  on  the  bank,  up  to  a 
certain  amount  and  within  a  certain  time, 
provided  certain  specified  shipping  docu- 
ments are  attached  to  the  draft. 

For  example:  A  and  Co.  of  New  York 
have  bought  from  B  and  Co.  in  Buenos 
Aires,  forty-eight  bales  of  wool  at  thirty 
cents  a  pound,  cost  freight  New  York; 
marine  and  war  risk  to  be  covered  by  A 
and  Co.  in  New  York,  at  their  own  expense. 
As  this  contract  is  subject  to  the  opening 
of  a  ninety  days  sight  bank  credit,  A  and 
Co.  file  with  their  New  York  bank  the 
proper  application  for  a  commercial  credit 
(see  p.  17). 

The  Bank  having  passed  favorably  on 
the  application  thereupon  issues  its  Letter 
of  Credit  (see  p.  19). 

A  and  Co.,  upon  receiving  the  instrument, 
forward  it  by  mail  to  B  and  Co.  in  Buenos 
Aires,  or,  if  necessary,  have  its  contents 
communicated  to  the  beneficiaries  through 
the  bank  by  cable. 

20 


II 


t 


New  York. 


19 


To  THE 

MECHANICS  &  METALS  NATIONAL  BANK  OF  THE  CITY  OF  NEW  YORK 

Gentlemen: 

Letter  of  Credit  havingf  been  issued  at  ^^  request  of  which  a  tn  e  copy  is  on  the  other  side,  J,  hereby  agree 
to  its  terms,  and  in  consideration  thereof  J,  acree  with  you  to  provide  in  New  York,  one  day  previous  to  the 
maturity  of  the  bills  drawn  in  virtue  there^^^g^^fficient  funds  in  cash,  to  meet  the  payment  of  the  same  with 

inwr  J,  undertake  to  insure  or  have  insured  at  ^,  expense  for^our 
property  purchased  or  shipped  pursuant  to  said  Letter  of  Credit. 


"per  cent  commi, 

benefit,  ag^ainst  risk  of  Fire,  Sea 
in  Companies  satisfactory  to 

^j  agree  that  the  titIo^9a\Wlioperty  which  shall  be  purchased  or  sliipped  under  the  said  Credit,  the  bills  of 
lading  thereof,  the  naU^i^ik^^nsurance  thereon  and  the  whole  of  the  proceeds  thereof,  shall  be  and  remain  in 
you  until  the  pajjjjanr^^ie  bills  referred  to  and  of  all  sums  that  may  be  due  or  that  may  become  due  on  said 
bills  or  othew(BS»^nff^til  the  payment  of  any  and  all  other  indebtedness  and  liability  now  existing  or  now  or 
hereafter  crase^or  incurred  by  ","  to  you  on  any  and  all  other  transactions  now  or  hereafter  had  with  you,  with 
authority  to  (S((e  possession  of  the  same  and  to  dispose  thereof  at  your  discretion  for  your  reimbursement  as 
aforesaid:  at  public  or  private  sale,  without  demand  or  notice,  and  to  charge  all  expenses,  including  commission 
for  sale  and  guarantee. 

Should  the  market  value  of  said  merchandise  in  New  York,  eitln-r  before  or  after  its  arrival,  fall  so  that  the 
net  proceeds  thereof  (all  expenses,  freight,  duties,  etc.,  being  deducted)  would  be  insuflicient  to  cover  your  advances 
thereagainst  with  commission  and  interest,  J,  further  agree  to  give  you  on  demand  any  further  security  you  may 
require,  and  in  default  thereof  you  shall  be  entitled  to  sell  said  merchandise  forthwith,  or  to  sell  "to  arrive." 
irrespective  of  the  maturity  of  the  acceptances  under  this  Credit,  ,',  being  held  responsible  to  you  for  any  deficit, 
which  „\  bind  and  oblige  „"^Jt"„  to  pay  you  in  cash  on  demand. 

In  case  J,  should  hereafter  desire  to  have  this  Credit  confirmed,  altered  or  extended  by  cable  (which  will 
be  at "',  expense  and  risk),  J,  hereby  agree  to  hold  you  harmless  and  free  from  responsibility  for  such  confirmation, 
alteration  or  extension  and  from  errors  in  cabling,  whether  on  the  part  of  yourselves  or  your  Agents,  here  or 
elsewhere,  or  on  the  part  of  the  cable  companies. 

This  obligation  is  to  continue  in  force,  and  to  be  applicable  to  all  transactions,  notwithstanding  any  change 
in  the  composition  of  the  firm  or  firms,  parties  to  this  contract  or  in  the  user  of  this  credit,  whether  such  change 
shall  arise  from  the  accession  of  one  or  more  new  partners,  or  from  the  death  or  secession  of  any  partner  or  partners. 

It  is  understood  and  agreed  that  if  the  documents  representing  the  property  for  which  the  said  Credit  has 
been  issued  are  surrendered  under  a  trust  receipt,  collateral  security  satisfactory  to  the  Mechanics  &  Metals 
National  Bank  of  the  City  of  New  York,  such  as  stocks,  bonds,  warehouse  receipts  or  other  security,  shall  be 
given  to  the  Mechanics  &  Metals  National  Bank  of  the  City  of  New  York,  to  be  held  until  the  terms  of  the 
Credit  have  been  fully  satisfied  and  subject  in  every  respect  to  the  conditions  of  this  agreement. 

It  is  further  understood  and  agreed  in  the  event  of  any  suspension,  or  failure,  or  assignment  for  the  benefit 
of  creditors  on  JHf,  part,  or  of  the  non-payment  at  maturity  of  any  acceptance  made  by  "',  or  of  the  ncyifulfillment 
of  any  obligation  under  said  Credit  or  under  any  other  Credit  issued  by  the  Mechanics  &  Metals  National  Bank 
of  the  City  of  New  York  on  ^,  account,  or  of  any  indebtedness  or  liability  on  ^j",  part  to  you,  all  obligations, 
acceptances,  indebtedness  and  liabilities  whatsoever  shall  thereupon,  at  your  option  then  or  thereafte4\exercised, 
without  notice',  mature  and  become  due  and  payable. 

It  is  understood  and  agreed  that  you  shall  not  be  held  responsible  for  the  correctness  ^^pkra^jjify  of  the 
documents  representing  shipment  or  shipments,  nor  for  the  description,  quantities.  qua^|^j\^i^alue  of  the 
merchandise  declared  therein. 


■ 


^ 


ACCEPT  ANCES 

In  order  to  protect  the  Bank,  A  and  Co. 
sign  an  agreement  (see  p.  21). 

B  and  Co.  in  Buenos  Aires,  upon  receiv- 
ing the  credit,  and  having  ascertained  that 
the  terms  of  the  credit  agree  with  the  terms 
of  sale,  place  the  shipment  aboard  steamer, 
prepaying  the  freight  according  to  contract, 
and  taking  out  the  bill  of  lading  in  the  name 
of  the  New  York  bank  according  to  the 
terms  of  the  credit.  B  and  Co.  then  draw 
up    their    draft    for    the    invoice    amount 

(see  p.  23). 

To  this  draft  are  attached  the  invoice, 
consular  invoice  and  full  set  of  bills  of 
lading.  B  and  Co.  take  these  to  their 
banker  in  Buenos  Aires,  producing  at  the 
same  time  the  Letter  of  Credit  of  the 
New  York  bank.  The  Buenos  Aires  banker 
thereupon  buys  the  draft  with  the  docu- 
ments attached,  at  the  current  rate  for 
bank  drafts  at  ninety  days  sight  on  New 
York,  paying  B  and  Co.  the  equivalent 
in  Argentine  currency. 

B   and  Co.   get  a  high  price  for  their 
dollar  draft;  because — 

1.  The    discount    for    the    ninety   days, 

22 


I- 


1, 


I 


t 


I 


INTENTIONAL  SECOND  EXPOSURE 


ACCEPTANCES 

In  order  to  protect  the  Bank,  A  and  Co. 
sign  an  agreement  (see  p.  21). 

B  and  Co.  in  Buenos  Aires,  upon  receiv- 
ing the  credit,  and  having  ascertained  that 
the  terms  of  tlie  credit  agree  witli  the  terms 
of  sale,  place  the  shipment  aboard  steamer, 
prepaying  the  freight  according  to  contract, 
and  taking  out  the  bill  of  lading  in  the  name 
of  the  New  York  bank  according  to  the 
terms  of  the  credit.  B  and  Co.  then  draw 
up  their  draft  for  the  invoice  amount 
(see  p.  23). 

To  this  draft  are  attached  the  invoice, 
consular  invoice  and  full  set  of  bills  of 
lading.  B  and  Co.  take  tliese  to  their 
banker  in  Buenos  Aires,  producing  at  the 
same  time  the  Letter  of  Credit  of  the 
New  York  bank.  The  Buenos  Aires  banker 
thereupon  buys  the  draft  with  the  docu- 
ments attached,  at  the  current  rate  for 
bank  drafts  at  ninety  days  sight  on  New 
York,  paying  B  and  Co.  the  equivalent 
in  Argentine  currency. 

B  and  Co.  get  a  high  price  for  their 
dollar  draft;  because — 

1.  The    discount    for    the    ninety   days, 

22 


i 


I 


I  • 


ii 


I 


i 


ACCEPT  AX CES 

which  the  draft  has  to  run  after  it  is 
accepted,  is  figured  according  to  the  New 
York  discount  market,  which  on  the 
average  is  Hkely  to  be  considerably  below 
that  of  any  other  money  center. 

2.  No  bill  stamp  is  charged  in  New  York 
as  would  be  the  case  of  London  or  the  con- 
tinent. 

B  and  Co.,  the  shippers,  having  knowl- 
edge of  these  advantages,  were  therefore 
able  to  quote  to  A  and  Co.  a  lower  selling 
price  for  the  merchandise  than  would  have 
been  possible  had  A  and  Co.  offered  a  Pound 
Sterling  or  other  credit.  In  other  words, 
the  American  importer  is  enabled  to  derive 
the  full  benefit  growing  out  of  the  use  of 
the  dollar  credit. 

The  Buenos  Aires  banker  in  the  mean- 
time has  forwarded  the  draft  and  the  docu- 
ments to  his  New  York  correspondents, 
who,  upon  arrival,  present  them  to  the 
drawee  bank  for  acceptance,  in  this  case 
to  the  Mechanics  and  Metals  National 
Bank.  The  latter,  upon  verifying  the 
draft  and  documents  with  the  terms  of  the 
credit,  "accepts"  the  draft  by  affixing  its 

24 


I 


n 


INTENTIONAL  SECOND  EXPOSURE 


.1  CCEPT  A  y  C  E  S 

which  the  draft  has  to  run  after  it  is 
accepted,  is  figured  according  to  the  New 
York  discount  market,  which  on  the 
average  is  Hkely  to  be  considerably  below 
that  of  any  other  money  center. 

2.  No  bill  stamp  is  charged  in  New  York 
as  would  be  the  case  of  London  or  the  con- 
tinent. 

B  and  Co.,  the  shippers,  having  knowl- 
edge of  these  advantages,  were  therefore 
able  to  quote  to  A  and  Co.  a  lower  selling 
price  for  the  merchandise  than  would  have 
been  possible  had  A  and  Co.  offered  a  Pound 
Sterling  or  other  credit.  In  other  words, 
the  American  importer  is  enabled  to  derive 
the  full  benefit  growing  out  of  the  use  of 
the  dollar  credit. 

The  Buenos  Aires  banker  in  the  mean- 
time has  forwarded  the  draft  and  the  docu- 
ments to  his  New  York  correspondents, 
who,  upon  arrival,  present  them  to  the 
drawee  bank  for  acceptance,  in  this  case 
to  the  Mechanics  and  Metals  National 
Bank.  The  latter,  upon  verifying  the 
draft  and  documents  with  the  terms  of  the 
credit,  ''accepts"  the  draft  by  affixing  its 


1 


>  ■ 


i 


( 


24 


f 


1 


ACCEPTANCES 

stamp  and  signature,  returning  the  same 
to  the  party  that  presented  it,  retaining, 
however,  the  shipping  documents. 

For  fac-simile  of  draft  after  it  has  been 
accepted  see  p.  25. 

The  presenting  bank  either  holds  the 
draft  until  maturity  or  discounts  it  in  the 
open  market,  in  accordance  with  the 
instructions  of  the  South  American  banker. 
In  the  meantime  the  steamer  carrying  the 
wool  has  arrived  and  A  and  Co.  request 
delivery  of  the  shipping  documents  in 
order  to  enable  them  to  make  custom 
house  entry  and  take  possession  of  the 
goods.  It  will  be  readily  understood  that 
by  giving  up  the  shipping  documents  the 
New  York  bank  is  giving  up  its  only 
collateral.  The  bank's  interest  must  be 
protected  and  the  documents  are  therefore 
surrendered  against  cash,  under  rebate  for 
the  unexpired  time  the  draft  has  to  run,  or 
against  approved  security;  or,  if  the  client 
is  of  good  financial  and  moral  standing  and 
has  the  confidence  of  the  bank,  against 
what  is  called  a  "Trust  Receipt".  (See 
p.  27.) 

26 


r  D  Na  m 


TRUST  RECEIPT. 


New  York,        April  Sud  1917. 

SrrriDrd  from  The  Mechanics  &  Metals  National  Bank  of  the  City  of  New  York, 

the  merchandise  specified  in  the  Bills  of  Lading  per ...  .3/1  fPwJMWx" 

Buenos  Aitet dated     Jla«cb  let  19lT..viz: 

Marks  and  Nos. 

P....  .C ,..    . 

155/200 

f  .  P  ^%s^    48  bales  of  wool 


consigned  to  me  (us)  by  them  for  sale  on  their  account,  and  in  consideration,  ^ 
I  (we) A....and..COBpaiiy 


of 


Be*  Tork hereby  agree  to  hold  said  goods  in  trust  for 


The  Mechanics  &  Metals  National  Bank,  and  at  their  disposal  for  the  purpose  of  selling 
the  same,  and,  in  case  of  sale,  to  deliver  as  soon  as  received,  the  full  net  proceeds  thereof 
direct  to  said  Mechanics  &  Metals  National  Bank,  as  security  for  due  provision  for  the 


acceptances  of .thA  MecbaaicA .  and  Jletals  .Jl«tioD&l.  Buk  of  the 

City  of. .Mew  lark 


I  (we)  further  agree  to  keep  said  property  insured  against  fire,  payable  in  case  of 
loss  to  The  Mechanics  &  Metals  National  Bank,  of  the  City  of  New  York,  with  the  under- 
standing that  they  are  not  to  be  chargeable  with  any  insurance  incurred  thereon,  hereby  waiving 
any  lien  which  I  (we)  might  otherwise  have,  as  regards  The  Mechanics  &  Metals  National  Bank 
of  the  City  of  New  York,  for  insurance,  duties,  or  charges  to  be  paid  thereon. 


Amount  of  Acceptance*  $15,348.50  due  June  29th,  1917. 


Credit  dated  January  26th,  1917 
lo.  M-704 


s^^, 


ACCEPTANCES 

According  to  the  Trust  Receipt  the 
customer  is  obligated  to  hold  the  goods  in 
trust  for  the  bank,  and,  when  sold,  to  turn 
the  proceeds  over  to  the  bank  immediately 
upon  collection  of  the  money,  which  is  to  be 
used  in  liquidation  of  the  amount  of  the 
Acceptance.  As  we  have  seen  from  the 
*' Agreement",  the  money  to  meet  the 
Acceptance  must  be  paid  to  the  accepting 
bank  at  the  latest  one  dav  before  the 
maturity  of  the  draft.  By  that  time  (after 
ninety  days)  the  goods  have  usually  been 
disposed  of  and  these  acceptances  are 
therefore  essentially  self -liquidating. 


28 


1 


DOLLAR  ACCEPTANCES  AGAINST 
EXPORTS 

The  procedure  of  financing  exports 
through  the  medium  of  Dollar  Acceptances 
differs  somewhat  from  that  use  1  in  financing 
imports. 

A  foreign  buyer  has  bought  goods  in  the 
United  States.  The  American  exporter 
who  sold  the  goods  demands  a  bank  credit 
against  which  he  can  draw  when  shipment 
has  been  effected.  The  buyer  abroad 
arranges  with  his  local  bank  for  the  credit, 
and  the  foreign  bank  in  turn  requests  its 
New  York  bank  correspondent  to  open  a 
credit  in  favor  of  the  American  shipper, 
available  by  the  latter's  ninety  days  sight 
drafts  .on  the  New  York  bank,  such  drafts 
to  be  accompanied  by  certain  shipping 
documents  which  are  then  specified.  The 
American  shipper,  after  having  effected 
shipment  and  secured  the  bill  of  lading 
and  other  documents  required,  draws  his 
draft  and  presents  the  latter  to  the  New 
York  bank  for  acceptance,  together  with 

29 


ACCEPTANCES 

the  required  shippincj  papers.  The  New 
York  bank  "accepts"  the  draft,  to  fall  due 
in  ninety  days,  and  returns  the  accepted 
draft  to  the  shipper,  forwardincj  the  ship- 
ping documents  Jb^y  first  mail  to  the  foreign 
bank. 

The  foreign  bank  turns  these  documents 
over  to  its  client,  the  buyer  of  the  goods, 
against  such  security  as  it  may  see  fit. 
Funds  to  meet  the  Acceptance  on  the  due 
date  are  guaranteed  and  furnished  by  the 
foreign  bank  to  the  New  York  bank.  This 
part  of  the  transaction  lies  entirely  between 
the  two  banks. 

In  the  mean  time,  the  American  shipper, 
who  in  payment  for  his  shipment  now  holds 
a  "Bank  Acceptance",  either  discounts 
that  Acceptance  with  his  own  bank,  or 
sells  it  in  the  open  market  at  what  is 
called  "the  ruling  rate  for  Member  Bank 
Acceptances",  thus  receiving  his  money. 

The  advantages  of  the  Dollar  Acceptance 
in  this  case  are  obvious:  The  foreign  buyer 
wants  ninety  days'  time  at  the  lowest  cost; 
this  the  American  seller  gives  him.  Know- 
ing that  he  can  sell  the  Acceptance  which 

30 


ACCEPTANCES 


he  receives  from  the  New  York  bank  at  the 
lowest  possible  rate,  he   (the  seller)   adds 
only  a  small  percentage  to  his  selling  price 
in  order  to  cover  himself  for  this  discount. 
The   American   seller   thus   is   enabled   to 
quote  lower  prices  than  at  any  time  before 
the  passage  of  the  Federal  Reserve  Act, 
when  he  was  compelled  to  draw  on  some 
foreign  bank,  which  procedure  compelled 
him  to  add  to  his  price  a  good  margin  to 
protect  himself  against  loss  in  the  exchange, 
against    a    higher    discount,    and    against 
f    the  cost  of  the  bill  stamps. 
^      It  may  be  said  here  that  the  American 
exporter  who  demands   a  bank  credit   to 
cover  his  sale  is  still  too  insistent  upon 
receiving  a  "sight"  credit,  under  which  he 
receives    "cash    against    documents".     If 
we   are   to   remove   a   positive   restriction 
from  our  export  trade  it  is  imperative  that 
our  exporters  consent  to  drawing  "long" 
drafts  on  the  American  banks  which  open 
the  credits,  if  so  requested  by  the  foreign 
buyers.     The  latter  want  time  in  which  to 
make  a  "turnover",  and  this  can  easily 
be  granted  by  the  American  sellers  at  low 

31 


ACCEPTANCES 

cost  and  little  or  no  risk.  The  excuse  of 
some  business  houses  that  they  do  not  care 
to  be  contingently  liable  as  drawers  of  such 
Acceptances  is  irrelevant,  since  such  con- 
tingent liability  is  unimportant  in  view 
of  the  fact  that  the  acceptors  of  such 
drafts  are  strong  banks  which  have  become 
still  stronger  on  account  of  being  members 
of  the  Federal  Reserve  System. 

Not  all  exports  are  covered  by  "Bank 
Credits",  in  fact,  the  majority  are  not. 
Notwithstanding,  Bank  Acceptances  have 
been  successfully  employed  in  the  financing 
of  such  exports,  particularly  exports  to 
South  and  Central  America,  the  banks 
paying  with  their  credit  by  giving  their 
"acceptance"  instead  of  paying  with  funds 
when  purchasing  documentary  drafts  on 
those  countries. 

'  Bank  Acceptances  may  be  employed  in 
anticipation  of  actual  exports.  For  in- 
stance: A  merchant  has  a  large  order  for 
an  export  shipment;  he  may,  upon  having 
made  proper  arrangement  with  his  bank, 
draw  long  drafts  on  the  latter,  using  the 
funds   thus   created   for   the   purchase   or 

32 


■<«       I, 


I 


i 


I 


L 


ACCEPTANCES 

preparation  of  the  shipment.  After  the 
shipment  has  been  made,  the  draft  on  the 
foreign  purchaser  or  the  foreign  purchaser's 
bank,  together  with  the  relative  shipping 
documents,  are  handed  in  to  the  bank  for 
discount  or  collection,  the  bank  in  turn 
using  the  proceeds  of  this  draft  in  liquida- 
tion of  the  original  Acceptance. 

This  method  has  been  successfully  used 
since  the  outbreak  of  the  war,  and  due 
credit  should  be  given  to  the  Federal 
Reserve  Board  for  its  intelligent  and  prac- 
tical interpretation  of  the  law. 


33 


I 

I! 
tf 


a 


<( 


ii. 


DOLLAR  ACCEPTANCES 

Against  domestic  shipment  of  goods, 
providing  shipping  documents  convey- 
ing or  securing  title  are  attached  at  the 
time  of  acceptance. " 

Secured  at  the  time  of  acceptance  by  the 
warehouse  receipt  or  other  such  docu- 
ment conveying  or  securing  title  cover- 
ing readily  marketable  staples, " 


In  order  to  finance  his  purchases  and 
take  advantage  of  the  cash  discount,  the 
merchant  formerly  went  to  his  bank  and 
borrowed  on  his  promissory  note  such  funds 
as  he  required.  The  rate  of  interest  which 
he  had  to  pay  varied  according  to  the  state 
of  the  money  market,  while  the  money 
market  in  turn  always  showed  the  effect 
of  our  old  banking  system,  with  its  lack  of 
rediscount  facilities  and  its  consequent 
tendency  to  sudden  and  abnormal  fluctua- 
tions. 

Today,  the  merchant  who  wants  to  bor- 
row   is    privileged    to    pursue    a    different 

34 


I' 


IE 


I 


ACCEPTANCES 

course.  Take  the  case  of  a  buyer  who  has 
to  meet  a  draft  for  $50,000,  covered  by 
domestic  shipping  documents. 

The  buyer,  having  made  the  proper 
arrangements  with  his  bank,  authorizes 
the  latter  to  '* accept"  the  seller's  draft  for 
$50,000  drawn  upon  the  bank — {not  upon 
the  buyer)  provided  the  draft  is  accom- 
panied by  certain  specified  documents,  such 
as  invoices,  railroad  bills  of  lading,  etc. 
There  are  instances  when  it  is  more  practi- 
cable that  the  customer  himself  draw  upon 
the  bank  instead  of  the  seller.  However, 
the  other  method  is  the  more  usual  one. 
The  draft  is  presented  by  the  seller,  ac- 
cepted by  the  bank  and  returned  to  the 
seller.  The  documents  are  withheld  by 
the  bank  and  turned  over  to  the  customer 
against  the  familiar  trust  receipt. 

The  seller  now  has  the  "Bank  Accept- 
ance" for  $50,000  which  he  can  readily 
discount  in  the  open  market.  Thus  the 
actual  funds  are  provided  under  competition 
by  the  banking  and  investing  community 
at  large. 

The  procedure  to  create  Dollar  Accept- 

35 


n 


i 


• 


ACCEPTANCES 

ances  secured  by  warehouse  receipts  or 
other  documents  covering  readily  market- 
able staples  does  not  vary  materially  from 
that  outlined,  except  that  the  customer 
of  the  bank  usually  does  not  designate  any 
third  party  to  draw  the  draft  on  the  bank, 
but  draws  it  himself. 

The  advantages  of  these  acceptances  are 

four-fold : 

First:  In  the  case  of  the  seller,  he  receives 
his  money  promptly. 

Second:  The  bank's  customer  has  obtained 
his  loan  (or  rather  credit)  at  a  lower 
cost  than  by  the  use  of  the  promis- 
sory note,  the  rate  for  a  three 
months'  promissory  note,  all  other 
things  being  equal,  being  higher 
than  the  discount  rate  for  a  three 
months'  Bank  Acceptance  plus  ac- 
ceptance commission.  This  differ- 
ence is  eloquently  illustrated  by  the 
different  valuation  applied  by 
European  bankers  to  an  investment 
of  ready  negotiability — as  compared 

36 


*      p 


ACCEPTANCES 

with  one  that  locks  up  the  funds 
of  the  bank. 

Third:  The  bank  is  able  to  accommodate 
its  customer  more  readily,  since  it 
advances  only  its  credit,  the  ultimate 
buyer  of  the  Acceptance  advancing 
the  actual  money. 

Fourth:  It  has  a  balancing  effect  on  the 
money  market. 

Thus,  through  the  use  of  the  Bank 
Acceptance  the  bank  can  take  care  of  the 
needs  of  its  customers  without  carrying 
the  merchant's  paper  in  its  portfolio. 

In  other  words,  the  bank,  when  granting 
accommodations,  is  not  dependent  upon  the 
amount  of  loanable  funds  it  has  available. 


37 


I 


TRADE  ACCEPTANCES 

There  is  a  fundamental  difference  be- 
tween a  Trade  Acceptance  and  a  promissory 

note. 

A  Trade  Acceptance  is  an  order  of  the 
seller  on  the  buyer  to  pay,  and  its  self- 
liquidating  character  is  prima  facie. 

A  note  is  a  promise  by  tKelnaker  to  pay, 
and  its  self-liquidating  character  is  not 
prima  facie. 

A  Trade  Acceptance  must  be  drawn  by 
the  seller  on  the  purchaser  for  goods  sold, 
while  there  is  nothing  to  indicate  the  origin 
of  a  promissory  note. 

While  domestic  Bank  Acceptances  cover 
commodities  such  as  grain,  cotton,  coffee, 
copper,  etc.,  usually  involving  large 
amounts,  the  Trade  Acceptances  are  used 
in  financing  the  ordinary  business  trans- 
action between  buyer  and  seller  on  direct 
sales  of  a  bill  of  goods. 

If,  for  instance,  a  merchant  has  sold  a 
bill  of  goods  on  the  terms  of,  let  us  say, 
2/10/60   (sixty  days  net,  2%  discount  if 

38 


I. 


! 


*  » 


'     I 


ACCEPTANCES 

paid  within  10  days),  at  the  time  the  invoice 
is  rendered,  the  invoice  is  accompanied  by  a 
sixty  days'  sight  draft  duly  filled  out,  drawn 
on  the  buyer,  together  with  a  letter  request- 
ing the  buyer  to  "accept"  and  to  return 
the  draft,  or,  if  he  should  prefer,  to  pay 
the  bill  less  two  per  cent  within  ten  days 
and  return  the  draft  unaccepted. 

Should  a  customer  develop  the  habit  of 
postponing  the  "sighting"  of  the  draft  un- 
duly long,  thus  automatically  extending  the 
due  date  for  a  corresponding  period,  the 
seller  should  draw  on  such  customer  at  a 
fixed  number  of  days  after  date,  say  sixty 
days  after  date.  By  the  use  of  such  "days 
date"  bills,  although  acceptance  may  be  de- 
layed, the  due  date  is  not  affected.  In 
case  the  seller  does  not  wish  the  buyer  to 
take  possession  of  the  goods  unless  the 
latter  has  accepted  the  draft,  the  shipping 
documents,  such  as  railroad  bill  of  lading, 
etc.,  are  attached  to  the  draft.  The  draft 
is  marked  "D/A"  (documents  to  be  de- 
livered against  acceptance)  and  then  given 
to  the  bank  for  the  purpose  of  obtaining 
the  Acceptance. 

39 


i 


ACCEPTANCES 

Shipping  documents  should  if  possible 
be  in  negotiable  form,  i.  e.,  the  l)ill  of  lading 
should  be  made  out  to  shipper's  order  en- 
dorsed in  blank. 

Some  business  houses,  recognizing  the 
importance  of  the  Trade  Acceptance,  and 
in  an  endeavor  also  to  make  it  advantageous 
to  their  customers,  are  granting  special 
inducements,  either  by  allowing  what  is 
termed  an  "Acceptance  discount''  or  by 
granting  additional  time,  or  some  other 
concession  in  consideration  of  obtaining  an 
Acceptance.  The  form  of  Trade  Accept- 
ances varies,  of  course,  according  to  the 
nature  of  the  business.  The  one  shown 
on  the  adjoining  page  is  a  common  form 
and  is  recommended  for  general  use.  It 
has  been  adopted  and  approved  by  the 
American  Trade  Acceptance  Council. 


40 


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ADVANTAGES  OF  THE  TRADE 
ACCEPTANCE 

Trade  Acceptances  have  been  used  in 
European  countries  for  generations  on  ac- 
count of  their  proven  economic  value. 
They  are  used  to  put  Book-Credits  into 
negotiable  form,  and  constitute  a  system 
by  which  Book-Credits  may  promptly  be 
converted  into  cash. 

Our  present  system  of  open  book  ac- 
counts, to  which  we  have  clung  so 
tenaciously,  is  productive  only  of  dead 
capital,  and  is  therefore  economically  wrong 
in  that  it  creates  immobile  credit  instead 
of  mobile  credit.  By  converting  an  open 
book  account  into  a  Trade  Acceptance,  the 
credit  represented  by  the  account  becomes 
immediatelv  available  for  further  use  by 
the  seller,  because  a  Trade  Acceptance  may 
readily  be  discounted  with  the  bank,  thus 
enabling  the  merchant  to  re-invest  in  his 
business  the  amount  of  capital  represented 
by  the  account. 

The  use  of  the  Trade  Acceptance  also  re- 

42 


I 


ACCEPTANCES 

moves  from  merchants  and  manufacturers 
the  necessity  of  acting  as  bankers  for  their 
customers  by  way  of  open  accounts.  The 
old  practice  results  in  loss  of  interest  on 
overdue  accounts,  and  waste  and  loss  from 
slow  collections. 

Through  the  use  of  the  Trade  Accept- 
ance the  necessity  of  furnishing  credit  falls 
where  it  belongs,  namely,  upon  the  banks. 
The  function  of  our  commercial  banks  is  to 
deal  in  credits,  and  in  case  of  necessity  they 
can  rediscount  these  Acceptances  with  the 
Federal  Reserve  Banks,  furnishing  the  latter 
with  eligible  paper  which  may  be  used  as  a 
basis  for  currency,  and  thus  creating  an 
elastic  currency  system  which  will  expand  or 
contract  according  to  the  needs  of  the 
country. 

The  Trade  Acceptance  curtails  the  buyer 
in  taking  unearned  or  unauthorized  dis- 
counts. 

The  Trade  Acceptance,  in  legal  proceed- 
ings, is  superior  to  the  open  book  account, 
since  it  is  a  written  acknowledgment  of 
debt,  and  a  promise  to  pay  on  a  fixed  due 

43 


i 


ft 


f\ 


ACCEPTANCES 

date.  In  some  of  the  foreign  countries 
the  law  provides  that  judgment  may  be 
obtained  within  three  to  five  days  on  the 
evidence  of  an  unpaid  Acceptance  and 
protest,  provided  the  protest  is  taken 
within  the  time  Hmit  set  by  law.  This 
illustrates  the  position  of  importance  which 
the  Acceptance  holds  in  the  economic 
structure  of  the  countries  abroad. 

By  the  use  of  the  Trade  Acceptance, 
friction  between  the  buyer  and  seller  is 
reduced  to  a  great  extent.  Not  being  able 
any  longer  to  take  advantage  of  his  position 
the  buyer  cannot  return  goods  without 
justification  or  indulge  in  other  abuses — 
abuses  which  in  the  past  arose  from  the 
granting  of  the  too-generous  credit  which 
resulted  from  the  open  book  account 
system.  Indirectly  the  retailer  is  paying 
dearly  for  this  privilege.  Elimination  of 
the  abuse  referred  to,  when  completely 
in  eflFect,  will  mean  the  elimination  of  a 
great  economic  waste,  and  will  tend  ma- 
terially to  lower  the  cost  of  distribution 
from  manufacturer  to  consumer. 

The  Trade  Acceptance  does  not  interfere 

44 


.iii'fi 


. 


ACCEPTANCES 

with  the  cash  discount.  Those  houses 
which  have  been  in  the  habit  of  putting 
out  their  own  promissory  notes  in  order 
to  raise  funds  with  which  to  take  advantage 
of  cash  discounts,  are  now  in  a  position 
to  use  the  Trade  Acceptances  which  they 
obtain  from  their  own  customers,  discount- 
ing such  acceptances  with  the  bank. 

From  the  bank's  point  of  view  Trade 
Acceptances  constitute  the  safest,  most 
liquid,  and  therefore  most  desirable  asset, 
second  only  to  Bank  Acceptances.  While 
Bank  Acceptances,  on  account  of  their 
security,  great  liquidity,  and  consequent 
low  discount  rates,  make  an  ideal  ''second- 
ary reserve",  the  Trade  Acceptance  is  more 
desirable  as  a  permanent  investment,  which 
in  case  of  need,  however,  may  readily  be 
converted  into  cash. 

In  lending  on  single  name  paper  the 
banker  lends  on  a  security  the  self -liquidat- 
ing character  of  which  is  not  prima  facie, 
and  about  the  origin  of  which  the  banker 
usually  has  no  definite  knowledge.  A 
Trade  Acceptance,  on  the  other  hand, 
covers  a  definite   transaction,   the  details 

45 


ACCEPTANCES 

of  which  may  readily  be  ascertained;  its 
self-liquidating  character  is  prima  facie. 
It  carries  two  names  instead  of  one  as 
security  and  is  therefore  infinitely  stronger 
than  the  promissory  note. 

Another  feature  which  adds  to  the  de- 
sirability of  the  Trade  Acceptance  for 
banks,  as  an  investment,  is  its  eligibility 
for  rediscount  with  the  Federal  Reserve 
Bank. 

The  Trade  Acceptance  (aside  from  the 
Bank  Acceptance)  constitutes  the  ideal  col- 
lateral for  the  issuance  of  Federal  Reserve 
notes.  In  fact,  under  the  banking  system 
of  no  other  country  of  importance  in  the 
world,  where  credit  forms  the  basis  of 
currency,  can  single  name  paper  be  redis- 
counted  with  the  central  banks,  while  on 
the  other  hand,  two  name  Acceptances  are 
re(iuired,  and  in  some  cases  even  an  addi- 
tional endorser  is  necessary. 

The  Federal  Reserve  Board,  recognizing 
tlie  importance  and  advantages  of  the  Trade 
Acceptance,  has  authorized  special  low 
rates  for  this  class  of  paper;  these  rates  are 
generally  one-half  per  cent  lower  than  the 

46 


•      • 


ACCEPTANCES 

rate  for  promissory  notes.  Although,  ex- 
cept in  some  special  cases,  the  law  does 
not  permit  the  Federal  Reserve  banks  to 
discount  a  Trade  Acceptance  having  a 
longer  maturity  than  ninety  days,  this 
does  not  mean  that  Trade  Acceptances 
must  not  be  drawn  for  a  longer  period.  In 
case  of  a  four  months'  Acceptance,  for 
instance,  the  commercial  bank  simply 
carries  it  until  it  comes  within  the  ninety 
days'  limit,  when  it  may  be  discounted 
with  the  Federal  Reserve  Bank. 

There  is  still  another  advantage  in  the 
use  of  Triade  Acceptances  in  their  relation 
to  the  banks:  Under  section  5200  of  the 
National  Bank  Act,  all  national  banks  are 
limited  in  their  loans  to  any  single  borrower 
to  ten  per  cent  of  their  capital  and  surplus. 
This  ten  per  cent  limitation,  however,  does 
not  apply  where  a  national  bank  discounts 
its  customers'  Trade  Acceptances. 

Section  5200  of  the  National  Bank  Act 
makes  the  following  provision  in  regard  to 
such  discounts:  "But  the  discount  of  bills 
of  exchange  drawn  in  good  faith  against 
actually  existing  values,  and  the  discount 

47 


I 


ACCEPTANCES 

of  commercial  or  business  paper  actually 
owned  by  the  person  negotiating  the  same 
shall  not  be  considered  as  money  bor- 
rowed. " 

The  advantage  of  the  Trade  Acceptance 
in  view  of  the  above  is  obvious,  particularly 
to  the  smaller  banks.  In  many  cases, 
these  banks,  on  account  of  their  location, 
count  large  mills  and  industrial  concerns 
among  their  customers,  who  usually  are 
large  borrowers.  Having  loaned  them  up 
to  their  ten  per  cent  limit,  the  banks  are 
unable  to  extend  further  accommodation. 
The  result  is  that  these  concerns  have  to 
go  outside  of  their  own  city  in  order  to 
obtain  additional  loans,  while  the  banks 
have  to  look  for  other  loans  in  which  to 
invest  their  money — loans  which  might 
not  be  as  desirable  as  those  which  they 
had  to  forego.  If,  now,  these  firms  elim- 
inate their  open  book  account  system  and 
sell  their  goods  against  Trade  Acceptances, 
they  are  enabled  to  turn  these  Trade  Ac- 
ceptances over  to  their  bank,  which  is  then 
in  a  position  to  grant  accommodation  with- 
out regard  to  the  ten  per  cent  limitations. 

48 


i 


I 


ACCEPTANCES 

The  advantage  to  the  banker  in  discount- 
ing his  customers'  Trade  Acceptances 
instead  of  his  promissory  notes,  in  case  his 
customer  goes  into  bankruptcy,  need  hardly 
be  enlarged  upon.  Although  a  promissory 
note  is  backed  by  the  entire  assets  of  the 
maker,  including  the  Accounts  Receivable, 
these  Accounts  Receivable  become  part  of 
the  assets  of  the  bankrupt's  estate,  while  the 
holder  of  the  note  merely  becomes  a  creditor 
along  with  the  other  creditors.  In  case  of 
a  Trade  Acceptance,  the  holder  collects 
from  the  acceptor  when  due,  keeping  the 
money,  whether  or  not  the  "Drawer"  in  the 
meantime  has  become  a  bankrupt. 


49 


^. 


ADVANTAGES  OF  TRADE  ACCEPTANCES 
TO  THE  BUYER 

Having  spoken  of  the  advantages  of  the 
Trade  Acceptances  to  the  seller  and  the 
banker,  what  now  are  the  advantages  to  the 
buyer? 

First  of  all,  those  merchants  who  agree 
to  settle  their  purchases  by  Trade  Accept- 
ances, will  be  looked  upon  by  the  sellers  as 
belonging  to  a  class  of  preferred  customers. 
The  man  who,  instead  of  buying  against  the 
open  account,  is  willing  to  accept  a  draft 
and  thus  go  on  record  that  he  owes  the 
shipper  a  certain  sum  of  money,  agreeing 
to  pay  at  a  certain  fixed  future  date,  will 
naturally  be  considered  as  one  who  has  the 
affairs  of  his  business  well  in  hand.     This 
fact  will  soon  find  recognition  in  an  advan- 
tageous mercantile  rating.     In  other  words 
the  use  of  the  Trade  Acceptance  by  the 
buyer  in  settling  his  obligations  enhances 
his  commercial  standing. 

50 


■ 


'^ 


8^ 


ACCEPTANCES 


\ 


^^ 


<9 
The  buyer  who  insists  upon  conductmg       />. 

his  business  on  the  open  book  account  basis  / 

pays  dearly  for  doing  so;  the  open  book 
account  spells  high  prices,  in  fact,  highest 
prices.  On  the  other  hand,  the  buyer  who 
is  willing  to  give  his  "Acceptance"  for  the 
debt  which  he  has  incurred,  receives  the 
full  benefit  of  this  method  by  obtaining  for 
himself  either  what  is  termed  an  "Accept- 
ance Discount"  or,  if  he  prefers,  additional 
time  in  which  his  Acceptance  is  to  fall  due. 

Trade  Acceptances  place  the  buyer  in  a 
position  to  secure  lower  prices,  and  thus 
compete  on  favorable  terms  with  those 
who  are  able  to  take  the  cash  discount, 
while  he  is  far  out-distancing  those  who 
buy  on  open  account. 

It  is  a  poor  rule  that  does  not  work  both 
ways;  the  rule  of  Trade  Acceptances  does 
work  both  ways.  It  enables  the  retailer 
to  ask  his  customer  for  Acceptances  on 
sales  which  he  makes  on  a  "time"  basis. 
Acceptances  thus  obtained  can  be  redis- 
counted  by  turning  them  over  to  the  jobber 
and  wholesaler  or  to  the  bank. 

51 


^; 


% 


ACCEPTANCES 

The   use   of   Trade   Acceptances   would 
receive  its  greatest  impetus  if  large  mer- 
chants,   manufacturers    and    corporations 
were  to  lead  the  way  by  using  this  method 
in    settling   their   own   obligations.     Aside 
from  the  good  example,  the  use  of  Trade 
Acceptances,  or  Bank  Acceptances,  would 
prove  a  distinct  advantage  to  large  con- 
cerns that  are  now  in  the  habit  of  taking 
cash  discounts.     By  conducting  their  busi- 
ness on  an  Acceptance  basis,  these  concerns 
would  be  able  to  considerably  increase  their 
turnover  without  an  increase  in  the  capital 
investment.      They    could    do    the    same 
volume    of    business    on    smaller    capital, 
or   with    less   borrowed    capital.     On    the 
other   hand,    the   method   of   taking   cash 
discounts  instead  of  acceptance  discounts, 
necessitates  the  accumulation  of  cash  to  be 
held  in  readiness,  during  which  period  it 
lies  idle  and  is  therefore  unproductive. 

The  business  community  of  this  country 
must  be  taught  to  look  at  the  question  of 
Acceptances  in  its  broader  aspects;  it  must 
be  made  to  realize  that  by  using  the  facilities 

52 


»      « 


»      • 


f 


ACCEPTANCES 

for  liquid  credit  which  the  country  now 
offers,  by  using  the  Trade  Acceptances  and 
resorting  to  Bank  Acceptances  when  neces- 
sary or  advisable,  it  is  not  alone  doing 
something  decidedly  beneficial  to  itself, 
but  it  is  also  performing  a  patriotic  duty. 


t 


I 


53 


' 


( 


k 


Foreign  Exchange 
Letters  of  Credit, 
Drafts,  Cable  Transfers 

The  Mechanics  &  Metals  National  Bank 
finances  exports  and  imports,  opens 
credits,  attends  to  ship  disbursements, 
issues  drafts,  and  effects  cable  transfers  to 

All  parts  of  the  World. 

We  offer  special  facilities  for  financing 
trade  with  Central  and  South  American 
countries.  We  have  our  own  direct  cor- 
respondents in  all  of  these  countries,  and 
handle  transactions  either  in  dollars  or  in 
other  currencies. 

On  application,  we  will  authorize  banks 
and  bankers  to  draw  their  own  drafts  on 
our  foreign  correspondents  all  over  the 
world. 

Our  service  is  at  your  disposal. 


n 


•f 


^  (* 


Bills  on 
South  America 

We  are  prepared  to  purchase,  or  send 
for  collection,  as  desired,  bills  on  the 
following;  countries: 


Argentina 

Bolivia 

Brazil 

British  Guiana 

British  West  Indies 

Chile 

Colombia 

Costa-Rica 

Cuba 

Dutch  Guiana 

Dominican  Republic 

Dutch  West  Indies 

Ecuador 


Guatemala 
Honduras,  British 

Honduras,  Spanish 

Martinique 

Nicaragua 
Panama 

Paraguay 
Peru 

Puerto-Rico 
San  Salvador 

Uruguay 
Venezuela 


Established  1810 


»         # 


Directors 


1 


The  Mechanics  &  Metals  National  Bank 

of  the  City  of  New  York 
20  Nassau  Street,  New  York 


Officers 

GATES  W.  McGARRAH,  President 

Vice-Presidents 

JOHN  McHUGH  HARRY  H.  POND 

FRANK  O.  ROE  SAMUEL  S.  CAMPBELL 

WALTER  F.  ALBERTSEN       NORTH  McLEAN 

JOSEPH  S.  HOUSE,  Cashier 

Assistant  Cashiers 


JOHN  ROBINSON 
ERNEST  W.  DAVENPORT 


ARTHUR  M.  AIKEN 
WILLIAM    E.    LAKE 


ALEXANDER  F.  BRYAN,  Auditor 


NORTH  McLEAN,  Vice-President 
Manager  of  Foreign  Department 


I 


*'■  • 


DANIEL  BARNES, 

President     Seamen's     Rank     for 
Savintjs 


JAMES  M.  BECK. 

Former  Assistant  U.  S.  Attorney 
General 


WILLIAM  E.  COREY, 

Chairman  of  the  Board  of  Directors 
Midvale  Steel  and  Ordnance  Co- 


W.  R.  CRAIG 

W.  R.  Craig  &  Co. 

WM.  E.  S.  GRISWOLD, 

i6  Broadway 

HENRY  O.  HAVEMEYER, 

President  Brooklyn  Eastern 
District  Terminal 

WILLIAM  A.  JAMISON. 
Arbuckle  Bros. 

L.  F.  LOREE. 

President  Tlic  Delaware  &  Hudson 
Co. 

V.  EVERIT  MACY. 

New  York 

T.  FRANK  MANVILLE. 

President  H.   W.   Johns-Manville 
Co. 


GATES  W.  McGARRAH, 

President 

JOHN  McHUGH, 
Vice-President 

CHARLES  M.  PRATT, 
26  Broadway 

ROBERT  C.  PRUYN, 

Chairman  of  the  Board  of  Directors 
National  Commercial  Bank, 
Albany.  N.  Y. 


SAMUEL  F.  PRYOR. 

1st  Vice-President  The  Remington 
Arms,  Union  Metallic  Cartridge 
Co ,  Inc. 


FERDINAND  W.  ROEBLING,  JR.. 
Treasurer  J.  A.  Roebling  Sons'  Co. 

HENRY  H.  ROGERS. 

Director  Anaconda  Copper  Mining 
Co. 

JOHN  D.  RYAN, 

New  York 

F.  DB  C.  SULLIVAN, 

Director  Interborough  Rapid 
Transit  Co. 


^m 


PAMPHLET  BINDER 

Syracuse,  N.  Y. 
Stockton,  Cali* 


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COLUMBIA  UNIVERSITY  LIBRARIES 

This  book  is  due  on  the  date  indicated  below,  or  at  the 
expiration  of  a  definite  period  after  the  date  of  borrowing,  as 
provided  by  the  library  rules  or  by  special  arrangement  with 
the  Librarian  in  charge. 


DATE   BORROWED 

DATE    DUE 

DATE    BORROWED 

DATE    DUE 

C28(955)100M££ 

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D725.21 
M46 


V  A(r4s.gp^cfcji 


>*4 


26Apr-32M    ^^  ^  _    (^^ 

Sot  Ujji  "5<^ 

JRN9    1961 


■■■- 


BOUND 

JAM  ^     1957 


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COLUMBIA  UNIVERSITY  LIBRARIES 


00442481 


64 


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END  OF 
TITLE 


